Tax Facts

7924 / Can an otherwise qualified RIC avoid disqualification as a RIC for failure to meet the RIC gross income test? What are the consequences of failing to meet the RIC gross income test?

If a corporation otherwise satisfies all requirements for RIC qualification, it will not be disqualified solely for failure to satisfy the 90 percent gross income test (see Q 7923) if (1) the corporation files a schedule of its gross income with the IRS after identifying the failure, and the schedule contains a description of each item of its gross income and (2) the failure to satisfy the 90 percent requirement was due to reasonable cause, rather than willful neglect.1

While the corporation can avoid disqualification as a RIC by filing with the IRS as discussed above, a penalty tax will apply. The tax is equal to the excess of (1) the gross income of the RIC that is not derived from qualified sources (see Q 7923) over (2) 1/9 of the gross income of the RIC that is derived from qualified sources.2

1.  IRC § 851(i)(1).

2.  IRC § 851(i)(2).

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